The Essential Building Blocks of Estate Planning – Episode #498

As a practice owner, you need to think about how to transfer your business in the event of death or disability. A thorough estate plan includes powers of attorney for medical and financial decisions, as well as ownership considerations. On this episode of the Dentist Money Show, Ryan welcomes Natalie Perry from Harrison LLP to talk about estate plan basics and some major changes that are coming.

Show Notes
Harrison LLP

 

---

Podcast Transcript

Ryan Isaac:
Okay, all right. So I’m glad you’re back. Thanks for being back with us again. It feels like it was a long time ago, but it was only a few months ago, I think. So thank you for being here.

Natalie Perry:
Yes, thanks for having me.

Ryan Isaac:
I was just pulling this up before we got started for everyone. We, uh, if you go check this out, we, we did an episode together. See if I can find the date on this. Actually, I don’t know if I can. Uh, it’s called the essential components of a good estate plan. Uh, Natalie, Natalie and I did this sometime, I don’t know, late, uh, 2023 episode four 36 of the Dennis money show. We went over a lot of basics that I think were really helpful. People love the show. I think we had people reach out to you, made some introductions that have been helpful, gotten a lot of good feedback. So would you mind giving an introduction though, to yourself, to your company, what you do and why you love estate planning more than anything in the whole world.

Natalie Perry:
Yes, I’m happy to talk about that. So I’m Natalie Perry. I’m a practicing attorney over 25 years doing just estate planning. And I think that’s important because some people do kind of dabble in estate planning and obviously it depends on your level of complexity, but you know, I’m really a specialist or really deep dive on estate planning day in and day out. So then I’m at a firm in Chicago, Illinois, and we do have offices around the country. So we handle about eight other states. And then we also work sometimes with local council because a lot of what we do is federal or it’s more, you know, gift or estate tax planning. And I do love estate planning. I just enjoy the personal nature of it and really trying to help people both plan for their families kind of on the personal side or the property side, you know, getting assets to kids or whoever the beneficiaries are in a tax-efficient manner and ideally in kind of a creditor-protected manner, you know, that’s another thing to think about even if the creditor is a potential son-in-law or daughter-in-law that we might be worried about. And I really just enjoy the personal nature of the business, you know, because we do sometimes have to get kind of deep on your family.

Ryan Isaac:
Yeah, go ahead and finish. I’m just agreeing. I’ll bet it was very personal. Yeah.

Natalie Perry:
We talk about all kinds of things, you know, kids, what they may or may not be good at. You know, sometimes these in-laws, son-in-laws, daughter-in-laws, who are we worried about and why? Do we want to treat someone differently? So we do get in a lot of deeper kind of personal issues and it’s just, I enjoy trying to help people, you know, work through those.

Ryan Isaac:
Yeah, thank you. Um, I, we as advisors find it difficult sometimes, maybe you can speak to this for a second, we find it difficult to refer to a state planning attorneys. I think number one, because like you said, a lot of people dabble in it, but it’s not something they’re really focused on, which can be a problem. Um, and if you want to expound on why that is problematic in any way, that’d be great. And then number two, it is a very state specific kind of relationship. And so that can be tough. Your, your firm has representation all over the place. So we, that solves a lot of the problems, but is there anything you want to say about being problematic, not being dabbling in estate planning or how hard it can be to find someone in your local area?

Natalie Perry:
Yeah, I think it is sometimes challenging to find someone who’s really skilled. And I’m in a national group of estate planners called the American College of Trust and Estate Council. And so we do have representation in all the states. And that’s great for me because my network then is, you know, filled with professionals out of state that I can rely on if I need help with a matter. But I think where we see it go wrong is somebody who just really doesn’t know the nuances of an estate plan. We are to some degree filling in forms with name, you know, kids names, executor, trustee. But lots of times we want to go to the second layer or even third layer of when do the kids get the money? You know, what kind of distributions should be made? Is there a really broad standard? Is there a more narrow standard? You know, are we looking at sometimes we like to put in a fixed amount of money, but that can get tricky, so we might want to keep things more discretionary. So really there’s a lot of design, you know, almost like building a house kind of concept. So if we just start on the first floor, you know, and don’t get to the foundation or the roof or something, you know, we may not have a house that really stands the test of time. So it’s really important to dig in.

Ryan Isaac:
Yeah. And I can imagine that just state to state things vary between ownership and beneficiary laws and how assets get divided and split up. Even in, you know, man, maybe this could be a topic for a second. We do have a main topic. We were going to talk about taxes. That’s what we’re going to get to. It’s very important. But a few questions here. Dentistry is an interesting business because, as you know most of the value in a dental practice is through goodwill. And, um, in some States, goodwill is like a marital property, um, that’s assigned to both people, no matter what happens. And then in some States, from my understanding, at least, um, it is not considered like a guaranteed marital property. So in like a death or a divorce situation, some people have been surprised based on their state. Who gets the value of the practice legally. And every time I see this, it just kind of speaks to the importance of doing this the right way and really like digging into, you know, even if you have just basic stuff going on, just to do this from a, just the right standpoint, because it can be so nuanced state to state.

Natalie Perry:
Right, I think that’s a good word. It is very nuanced. There’s lots of ins and outs that people can overlook if they’re not really doing it all the time.

Ryan Isaac:
Yeah. Okay. So let’s talk about taxes, estate taxes specifically. I think for most of our audience, this is going to be a subject they’re not really familiar with. And I think for a lot of our audience, many average dentists, and when I say average, I mean successful people who will retire with lots of money, but probably still be under the threshold where they won’t owe the state taxes. This might not really cross their minds, but there’s a large segment of our that will be dealing with estate taxes. And I think it’s kind of a hard subject to understand. Can you start with the basics of what an estate tax even means and kind of where it stands today and then we can talk about where it’s going to be moving to in the near future.

Natalie Perry:
Yeah, so a stay tax is confusing to people, I think, because it’s more in the nature of a transfer tax as opposed to an income tax. I mean, we all know income tax. Every year we’ve got to pay our income tax. We all know capital gains tax. You know, even if you don’t have a business, you might have investments that generate capital gain. But a state tax or gift tax is really the transfer of assets, you know, from person A to person B. And if we’re talking about transfers between spouses, we don’t have to worry because there’s no estate or gift tax on those. But now when we’re leaving assets to children or other beneficiaries, run it into the estate tax. And that is because it’s a transfer tax. So it comes into effect either at death when assets are passing to the next of kin or during a lifetime if a gift is made to people. And there are some limited exclusions that you can take advantage of each year. There’s an $18,000 annual exclusion which says you can give as many people as you want indexed for inflation. And then there’s also gifts for tuition and medical expenses. So if you pay someone’s tuition directly, that is not treated as a gift. And same for medical bills, not treated as a gift.

Ryan Isaac:
Okay. So just to recap that some of these, these do apply to our clients and audience a lot every year. Currently in this year, 2024, you can give each, um, if you’re married, each spouse can give $18,000 per person. So if you have a family with kids or grandkids, even you could each, each person could give $18,000, uh, per, per spouse to each kid, um, every year. And then directly paying for medical expenses or tuition is actually pretty common with some of our audience. Okay, so those are things that people might be familiar with and deal with. And just so, I mean, this is for me, as much as anyone else, just to recap what you’re saying, an estate tax is basically a transfer tax. It’s a tax of transfer of wealth. Normally happens around death. And what you said is when one spouse transfers wealth to the spouse, the surviving spouse, there is no tax then but once it goes from that spouse to someone else or from the deceased to someone else that’s not a spouse, that’s when the tax applies, is that correct? Did I get that? Okay. And right now there’s certain thresholds in this year, 2024. Do you wanna talk about what some of these thresholds are right now?

Natalie Perry:
Yes, they’re quite high. So as you said, they don’t affect a lot of people right now. The per person exemption for 2024 is $13,610,000. So times two, you know, that’s quite a bit of money. And then the, where I am in Illinois, we have an estate tax and the exemption for that is $4 million. And there are a handful of states, I think it’s around 13 that have their own estate tax as well. So probably not where you are, a tax. But the key that I wanted to talk about today is that the number is quite high but under the current legislation that number is scheduled to revert back to the pre-Trump Tax Act number which was five million dollars. So that is indexed for inflation and we expect it to land somewhere between you know five and seven million because inflation was fairly high over the last couple years. We don’t know the exact amount and of course Congress could act between now and January 1st of 2026, which is when this is scheduled to change. But if that does come into effect, you know, it’s going to affect more people than it has now.

Ryan Isaac:
Okay. Yeah, that does. Um, that does get into the threshold where that would be, that would affect, um, many of our clients actually. Uh, so just to recap, let’s say, uh, we have a dentist and she passes away and she gives her wealth to her surviving husband. Um, if she gave less, if she gave or passed down $13 million or less as of right now  even if it’s more, it wouldn’t be taxed, right? If it goes to her spouse, is that correct? If it went to her spouse, okay, that would not be taxed. If it goes from that spouse to other people, then, and it’s over the threshold of 13 million or 26, would have to be 26.

Natalie Perry:
So in the federal system, it is kind of treated as a unified exemption. And that’s important to know, because if you don’t have a estate plan with an AB trust, we call it, you know, structure, it doesn’t really matter because the federal system, it treats it as a unified dollar amount. So even if in your scenario, husband or whoever died with 26 million, no tax, because her exemption would have moved over to him.

Ryan Isaac:
Okay, so it becomes combined. Does this change when it’s not like a legal marriage or if it’s a partnership and it’s not like a legal marriage? Is that, does that change things?

Natalie Perry:
Yes, definitely. So you may know Congress did, I mean, for example, like gay marriage is legal. So that has been, you know, adjudicated by the Supreme Court to say that, of course, that’s treated the same as any other marriage. But if you’re like common law marriage or just domestic partners. I don’t know what the current phrase is, but if you’re not legally married under the federal law, or it’s state law, but federal law will recognize an individual state’s definition of marriage, you may not be eligible for the marital deduction. And if that’s the case, you still get the 13 million, but you would want to make sure you have some planning to maximize both individual members of the couple’s exemption.

Ryan Isaac:
Yeah, interesting. Okay. So right now that’s a very high amount. That changes drastically in two years. Do you have anyone in your industry, is it talked about, is there any insight as to the likelihood of it changing and reverting back to such a low amount? Do you think there will be action taken or is it just total speculation like tax rates and tax code changes are?

Natalie Perry:
Yeah, I think generally total speculation. Now in the past, Congress has always either extended or, you know, increased the exemption, kept it in place essentially. But this time, if they do nothing, the exemption goes down, down automatically. So I guess it’s a little bit more possible that, you know, they can get away with kind of not acting, you know, they don’t have a duty to extend it per se, but it’s really hard to say what will happen. And obviously we have an election coming. So it seems very hard to predict right.

Ryan Isaac:
Yeah, yeah, hard to say. We don’t know. Yeah, we don’t we don’t know. Okay, so that change could happen in 2026. Is there are there scenarios where this kind of tax or this situation could affect someone in a non death situation of just a transfer in general? Like if someone does not pass away, because we’re kind of talking about this. Yeah, not, it’s probably not the right term to use, but just in a different situation, other than someone passes away and leaves wealth to, uh, behind to someone, are there other situations, just maybe gifting situations where this happens? Okay. Hmm. Okay. Um, so what do people, what do people need to start thinking about or doing, um, to plan ahead? This is where, this is where different kinds of insurances come  into play in estate planning to pay for estate taxes or making sure you have enough liquidity. People of course, depending on their asset types, don’t necessarily wanna liquidate certain assets in order to pay these taxes or the burden, you know, it’s a big burden to fall on people. Well, first actually, do you wanna talk about the rates at which these are taxed maybe currently and what those changes might be?

Natalie Perry:
Yeah, so right now the rate is 40% for the estate tax and it’s a flat rate. And in Illinois where I am, states may very obviously, it’s a graduated rate, goes up to 16%. So that’s right. So Illinois is considered kind of a high tax state on the estate tax side. But generally the federal rate, it’s at 40%. And if they don’t do anything, it stays at 40%. You know, we might want to edit that. I have to look. I’m not sure that the prior rates, whether it was 45, they changed it so often now, we used to know it off the top of our heads. So, yeah.

Ryan Isaac:
Yeah, no, yeah, we can, yeah, that’s fine. In any case, that’s a very high, I think people would be surprised by that. It’s a very high rate, yeah. I’m imagining though that very, very wealthy people that are tens or hundreds of millions of dollars above these thresholds at any given point do something about it. They’re not just gonna pay 40% of their wealth on death or transfer. So what are some of the strategies that people should be thinking about? And at what point in time do you really start considering this?

Natalie Perry:
Well, let me take the second one first, because that might be a better thing to think about. And the answer is probably later this year, early next year. I think attorneys, we’ve had a few years of this, where these last minute tax changes are pending. And attorneys get really swamped trying to keep up with possibilities. And obviously, like I said about design, if someone is going to make a gift that large, we’re not just going to decide in 10 minutes how to do it and you want to put some thought into it, maybe draft a trust, you know, maybe set out the terms, kind of like I said. So that could take, you know, a few months at the minimum, I would think, you know, really. So definitely, I think, you know, later this year, early next year, it may depend on the stock market, if people are feeling poor, because the stock market goes down or with the election that could impact that. But then the second thing, I think then one of Spousal Lifetime Access Trust or SLAT. And really what that is, is you make a gift to a trust for the benefit of your spouse and children or whoever your beneficiaries are, if they’re not children. People like those because the spouse as beneficiary still has the ability to sort of siphon some money back to the person who made the gift, husband or wife. So those are popular because they give clients a little bit more security, feeling like. needed this money, you know, to some degree. Obviously, we don’t want to set this trust up if you think you’re going to be living off of that money, but if there was some emergency or unexpected loss of market value, you know, you would have a way to get some of the money back. So, those are quite popular and of course like you said life insurance trust, you know, that’s a great way to insure against the state tax or provide some liquidity if there is going to be an estate tax. We see those a lot with illiquid clients, so maybe your clients like dental practice owners and other business owners who may want their money is tied up in their business, but they know when someone dies, they’re not gonna have cash on day one. So they want some insurance to offset that need for cash.

Ryan Isaac:
Hmm. Yeah, that’s really interesting. The threshold where it sits right now of 13 per person will exclude, and especially when it’s combined with a legal spouse, that will exclude a lot of dentists, even pretty wealthy dentists. But when it reverts to five per person, that $10 million net worth for many dentists these days is a threshold that people are starting to surpass. When I, maybe it’s probably really complex calculations, but I’m just curious generally how the calculations kind of work. If someone’s worth, let’s say it’s reverted back to five million a person in a combined of 10 million if I’m doing that correctly. Let’s say they’re worth $15 million. Do they just pay a flat 40 on that excess $5 million or are there things they can deduct like income taxes where you have like deductions against your possible tax bill? Are there things like that or is it pretty straightforward? Anything above your combined total and you pay 40 or whatever the rate’s gonna be. Okay.

Natalie Perry:
No, there are deductions. So you could give money to charity, that’s a deduction. You know, some people would rather see a charity get the money than the IRS. So that’s one way, you know, build in some charitable giving. And then there’s deductions for fees of somebody’s death, like lawyer fees, accountant’s fees, say you’re getting appraisals to sell real estate, you know, broker fees, those kinds of things are all deductible real estate taxes. So it’s not going to be, you know, every dollar that you die with. I think we figure expenses around one, one and a half percent when somebody dies. So there’s usually some deductions, but charity is a great way. You know, I try to tell people the IRS is a beneficiary in their state plan. So if you get to that point, maybe putting in a little charitable gift would help offset that. You can feel like you’re doing some good and your kids weren’t gonna get that money anyway, unfortunately.

Ryan Isaac:
Yeah, it was going to go somewhere. Yeah. Okay. That, that, that makes sense. Um, I’m just thinking from the advisor’s perspective too, of how to help some of my clients that will be over that, um, $10 million threshold sometime in their fifties and sixties. It’s, it’s more than it used to be for sure. These days, uh, at the end of career dental practices, especially if you have a large one or many practices that are being sold to, in two groups in groups and, uh, for very large amounts of money. And this is going to affect a lot of people and, um, yeah, maybe just something to start thinking about ahead of time. Maybe we could go back a little bit. We, we covered some of this in our first episode. Um, but where do people begin with an estate plan? I think this is a good reminder, maybe something just to circle back on people. From my experience, feel kind of overwhelmed. They don’t know where to begin. Um, they don’t know where to start. And, uh, like what advice would you give that person, even if they’re not facing, you know, older age or an imminent estate tax situation, where does someone begin just in their estate planning journey?

Natalie Perry:
Well, I think having an attorney is a good first step. Maybe doing some research online or asking a friend or an accountant or business advisor for a referral of somebody who’s qualified. And then you really need to kind of put together your financial details and think about kind of who’s gonna get what under your documents. And then also kind of who’s in control. So if you’re able to locate an attorney, they’re really gonna walk you through that process, ask you the right questions, you think through, you know, how should the kids get the money and when and who should be in charge and if you have multiple children should it be all the children or one of the children. Those are all kind of hard decisions but another way to identify an attorney it would be this website I mentioned the ACTAC website so it’s it’s actec.org and that is a association of trust and every state so you can look on there and that might be a starting point. And if you find someone in your area who isn’t a fit or near your area, you know, oftentimes they’ll refer you to somebody or suggest somebody who might be a good fit for you.

Ryan Isaac:
Yeah, okay. And your own company’s website is what?

Natalie Perry:
We’re HarrisonLLP.com. So Harrison is two R’s, H-A- And I’m on there and we do have a number of offices and we also can make referrals or suggest people, you know, outside of our region, given that we can’t cover everyone.

Ryan Isaac:
Yeah, everybody, you and your company have been very helpful in a lot of client search situations. Back to what you were just saying, I know a lot of dentists, even when they’re doing fairly well and they’re starting to build wealth, feel, again, overwhelmed with the process of estate planning, especially when it comes to nominating who gets money, when some dentists feel like, I don’t even have any money to give anyone, I’ll have his debts but there’s still more to an estate plan than just where money goes, correct? There’s more decisions to make if something were to happen. Do you wanna talk about some of those maybe common things that still end up in an estate plan that have nothing to do with the transfer of money necessarily?

Natalie Perry:
Yes, that’s an important area too. I think you’re talking about powers of attorney for during your lifetime. So of course as we age, we’re really more likely to become incapacitated than we are to die, but planning for incapacity is really just as important and a part of any estate plan would include powers of attorney for medical and for financial. Different states call them different things. Sometimes they’re called advanced directives or living will. Some states have durable power of attorney. So there’s kind of a number of different phrases that are used for those. Essentially those documents say that if you’re alive but incapacitated and can’t make either medical or financial decisions for yourself, you want to set forth who should make them. And then once you’ve decided who would be in charge, you also get to pick some other things like do you want to be kept on life support? Do you want your agent to consider the burdens of treatment versus the cost or of course consult with the physician? But actually some people prefer just to have their individual family member decide kind of without it being written into the document that they have to consult a physician and of course you would assume people are generally going to as they’re in some sort of hospital or other institution but you can really be specific. Some people don’t want CPR for example. I’ve had a number of people say either they’ve heard stories of bad outcomes or whatever. Also organ donation is another area. Sometimes you can put forth your wishes. You know some people religious reasons, you know, other people of course want to specify. So really lots of even burial, I didn’t talk about that, but you can include do you want to be cremated, do you want to be buried, maybe you’ve already purchased somewhere, you know, where you do want to be buried. So all that can also be set forth and and really that is just as important, you know, as like you said, the who gets the money, you know. And I think taking the burden off the kids is really helpful if you’ve got kids or whoever, you know, people feel to try to follow your wishes or decide what would this person have wanted and if you’ve got it spelled out that makes it so much easier.

Ryan Isaac:
Yeah, I can imagine it gets very emotional and probably complicated when there’s a lot of different people trying to make decisions. What happens with those decisions if they’re not spelled out in a document such as an estate plan? Does it just get fought out among the heirs or remaining partners or spouses or the state? Or like, you know, like resuscitation or how burial gets done or who watches kids if they’re involved? How does that get decided if it’s not spelled out somewhere?

Natalie Perry:
Yeah, well sometimes we might need a guardianship proceeding where there’s a legal, a court, a points of basically a decision maker for either an elderly person who’s incapacitated or a child or something like that. And that’s a fairly costly process because you have to go through court, you have to get notice on the person who’s being decided to be disabled, and it’s fairly involved. You know, you have to have this person interviewed or evaluated and it can really be time consuming. So it’s not like that person is gonna, the next week, start writing checks on your behalf. It’s pretty involved. Could take a few months, really depending on where you live, how quickly you can get access to the courts to get a guardian appointed. Sometimes in the medical situation, I think some hospitals will take the next of kin’s direction. Oftentimes I think that really will vary with each hospital or institution and their legal department. They may have their own form that you fill out when you check in.

And sometimes people can use that mechanism instead of having it done ahead of time. But that’s definitely kind of a last resort. You really would be better off doing it when you’re not in crisis or really need to make a last minute decision. So there’s kind of a myriad of ways that these things might be resolved, but none of them are quick or inexpensive, I would say.

Ryan Isaac:
Yeah, that’s probably the key. And then if you have specific preferences for after you are gone or incapacitated, yeah, that’s leaving a lot to chance. Um, one more question I’m curious about how does, um, a lot of our listeners and clients are business owners with partners, uh, like partners in the business. And, um, does, does the steep planning cover the realm of like key man policies and covering, you know, key kind of key partnerships, um, in the case of. death or disability. I mean, most of our clients and listeners carry insurance for that, but a lot of times there’s not a legal document spelling out exactly what happens. Is that a separate thing from someone’s personal estate plan?

Natalie Perry:
Yeah, I would say it’s kind of estate planning adjacent, you know, meaning it’s part of any process of deciding what will happen if you’re not there or not able to make decisions because again the disability could be an issue You know who would step into your shoes? So I we often do do shareholder agreements or buy-sell agreements depending on you know The right who’s going to have the right to buy it who should be in charge of that business interest kind of thing So I think that’s also a very important Component to any you know, maybe the second step of a state planning once you’ve kind of finished your state plan.

Ryan Isaac:
Okay. Yeah. That, uh, there’s been just two cases in the last 30 days of clients who are going through some kind of disability or, you know, medical or accident condition. And there’s nothing written or set in stone with their practice and they’re relying on, you know, the goodwill and generosity of friends, colleagues to come in and work in their practices on their off days, but that’s tough. That’s not a good long-term solution and it’s nice to have something kind of set in stone and insured honestly, those risks. So, okay, to round it out, is there anything that you would want people to know in 2024 heading into an estate planning situation, any like common mistakes or red flags or just some last advice you would want people to know is they’re like exploring this for the first time maybe or needing to update it? We have a lot of clients who haven’t updated things for 15 years and significant changes have happened since then.

Natalie Perry:
Yeah, that’s a good point update. I think people do tend to let their documents get kind of stale, you know, and, and forget like, oh, my parents are my executor or trustee, you know, but now they’re gone or they’re, they’re too old to really be the right person for that role. So that’s definitely a good point. And I think if anything, maybe for 2024, time is more of the essence than it typically is with estate planning. People often think, you know, oh, I’m in my fifties and I’m not going to die anytime soon, but we all know stuff happens and it’s always better to be prepared. And I kind of emphasized this before, but I think making these decisions when you’re not pressed for time or kind of rushing through the process really can help you and your attorney, I think, because you want to have a thoughtful discussion and you want to be able to go home with your spouse and talk about, oh, the lawyer said this, the lawyer said that, what should we do? So the more time you have to kind of put into it and, or not that it needs to take hours of time, but the more kind of preparation and planning, let’s say, right? Like kind of thought thinking ahead, I think the better.

Ryan Isaac:
Yeah, these aren’t things you want to make under high stress, pressure, anxiety, tight deadlines. Um, you want to be able to think clearly and have time to think through them. So, yeah, I think that’s really good advice. Uh, remind us one more time where people can reach out and, um, connect with you and your firm.

Natalie Perry:
Yeah, I’m Natalie Perry. You can find me on LinkedIn. I’m a JD and CPA and that is in my LinkedIn title. So look for me there. I’m also on our firm’s website, which is HarrisonLLP.com. And you can find my email address and phone number on there. If I can be helpful, let me know.

Ryan Isaac:
Yeah, thank you very much. And yeah, if we have listeners or clients who would like an introduction, we can make introductions to you and your team as well. So, all right. Well, thank you, Natalie, again, for coming and talking estate planning. And I’m sure we’ll do this again soon, but I really appreciate it. Thank you. All right. Take care. Thanks everyone for tuning in. We’ll catch you next time. All right.

Natalie Perry:
Sounds good, thank you Ryan. Okay.

Estate Planning